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The one trillion euro digital currency: How to issue a digital euro without threatening monetary policy transmission and financial stability?

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  • Paolo Fegatelli

Abstract

The introduction of a general-purpose central bank digital currency (CBDC) carries the risk of bank disintermediation, potentially jeopardizing financial stability and monetary policy transmission through the bank lending channel. By adapting the theoretical framework of Dutkowsky and VanHoose (2018b, 2020) to the euro area, this study clarifies the conditions under which a digital euro could be introduced on a large scale without leading to bank disintermediation or a credit crunch. First, the central bank would need to set up proper mechanisms to manage the volume and the user cost of CBDC in circulation. Second, since some bank deposits will be converted into CBDC, the central bank should continue to facilitate access to its long-term lending facilities in order to provide banks with an alternative funding source at an equivalent cost. Depending on its design, a digital euro could improve bank profitability by absorbing large amounts of idle (and expensive) excess reserves without penalizing lending. A digital euro could also improve banks’ competitive position relative to non-bank lenders and encourage bank digitalization.

Suggested Citation

  • Paolo Fegatelli, 2021. "The one trillion euro digital currency: How to issue a digital euro without threatening monetary policy transmission and financial stability?," BCL working papers 155, Central Bank of Luxembourg.
  • Handle: RePEc:bcl:bclwop:bclwp155
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    Cited by:

    1. Ahnert, Toni & Assenmacher, Katrin & Hoffmann, Peter & Leonello, Agnese & Monnet, Cyril & Porcellacchia, Davide, 2022. "The economics of central bank digital currency," Working Paper Series 2713, European Central Bank.
    2. Fegatelli, Paolo, 2022. "A central bank digital currency in a heterogeneous monetary union: Managing the effects on the bank lending channel," Journal of Macroeconomics, Elsevier, vol. 71(C).
    3. repec:ecb:ecbdps:202220 is not listed on IDEAS

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    More about this item

    Keywords

    Central bank digital currency; cash; central bank; monetary policy; excess reserves; reserve requirements; universal central bank reserves; bank deposits; bank profitability; bank credit; inside money; collateral;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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